The big unknown for investors at the moment is whether we are about to see another classic rotation out of increasingly expensive growth stocks into cheaper sectors as evidence of an economic bounce-back accelerates in 2021. The first chart below is from the quant team at SocGen led by Andrew Lapthorne and shows that key factors indicative of a value bounceback are surging relative to growth – with the price to book measure taking the prize for the biggest returns in the last few weeks.
The next chart is from a new advisory firm called Tricio, which is cleverly marketing itself as an “investment buddy” for finance professionals. Three hugely experienced investment experts have come together to produce regular notes for advisers, briefing on everything from macroeconomic data to….style rotations. Cue the next chart below from Gerry Celaya of Tricio. You can find out more about the firm here – www.tricio-advisors.com
“The chart above is the quarterly chart of the Russell 2000 with a relative strength comparison to the Nasdaq 100 (red line). The latter is levels not seen since the dot com era bubble of the last 1990s and turn of the century. The bursting of the dot com bubble saw the Russell 200 outperform for a few years. “
Gerry Celaya suggests that there is a “ building risk that some US tech shares are in bubble territory” whereas by contrast US small caps, especially those with a value bias look much better value.
And sticking with that value theme, again to repeat something I have already mentioned before in this blog – the UK is still cheap even after the recent rally. Morgan Stanley’s European equities team have been banging the same drum as this blog and their latest note from Matthew Gorman and the team says they still expect the UK to outperform Europe next year, with the FTSE 100 set to grow 17% next year versus 10% for the MSCI Europe index.
“This reflects stronger EPS growth, more helpful FX trends, cheap valuations and a rebound in Value which favours UK outperformance. Recent vaccine news flow cements our faith in a strong recovery next year and helps the Value rotation, while a Brexit deal, if and when approved, should also provide some support to UK assets…. UK cyclicals trade at a sizeable discount to European cyclicals. While the early cycle reflationary environment is likely to keep cyclicals supported, after a very strong run from the March lows aggregate European cyclicals now trade at lofty relative valuations. However, UK cyclicals still trade at a sizeable discount to European cyclicals, even if they have re-rated somewhat in recent weeks.”
The giant graphic below is a compendium of various quant measures which all point to one basic fact – Uk stocks are extremely cheap versus peers.
“The UK is the cheapest global region on a market capitalisation and median stock basis across a broader range of valuation metrics and continues to sit near historical lows relative to global equities even after accounting for differences in sector weights.”
One last insight – the MS analysts have also looked at various sectors which they think might disproportionately benefit, especially if they are cyclical. Using this sector analysis they’ve identified five stocks they think offer sizeable potential upside. These are ITV, Hays, Marks & Spencer, NatWest and Taylor Wimpey.
I’d certainly share this optimism for ITV and Taylor Wimpey.
Last but by no means least, for those readers who are slightly more cautious I thought I’d share a bit more detail on Bill Ackmann’s Pershing Square hedges announced earlier this month. According to Matt Hose, Jefferies funds analyst we know the hedges are on U.S. and European investment-grade credit.
“Therefore, as in the case of the highly successful hedge trade from February this year, it will protect against a marked widening of spreads. While Mr Ackman stated he is ‘pretty bullish on 2021’, the hedge still offers the fund a source of (low cost) asymmetric returns should there be a near-term market set back. Here the Financial Times highlighted the latest hedge is close to 30% of the size of the earlier trade, albeit if this refers to notional exposure, the proportional impact on PSH will be further moderated by the fact that the NAV is currently 66% higher than it was at the end of February.”
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